About Tax Credits
LIHTCs: Supporting Affordable Housing Nationwide:
The federal low-income housing tax credit is one of the most effective tools ever created for financing the development of affordable housing. Enacted in 1986 as a way to encourage private investment in the sector, the credit has helped fund more than 1.9 million new homes that are affordable to low-income families, the formerly homeless, the elderly, the mentally handicapped and others with special needs.
The tax credit dramatically illustrates the value of public-private partnerships. It offers institutional investors a credit against their federal income tax in return for their low-income housing investments. As such, it represents a $6 billion market for annual investment that produces more than 140,000 affordable apartments each year.
The credit has been, and continues to be, an invaluable tool in the effort to revitalize communities and spur economic development, both of which are needed in many urban and rural areas.
How Does the Credit Work?
The federal government allocates low-income housing tax credits to each state based on population (in 2007, the level is set at $1.95 per person, with a minimum of $2,275,000 allocated per state). The state—through its state housing finance agency (HFA) or other allocating agency—then awards those credits to the projects that best meet the requirements of its Qualified Allocation Plan (QAP), which outlines its goals for affordable housing. Each state establishes its own policies and procedures to determine which developers qualify for credits.
On average, tax credits represent 50 percent of a project’s total financing, and competition for the credits among developers is often stiff. Many states see requests for two to three times the number of available credits, indicating the enormity of the need for decent, affordable housing.
There are two types of credits available—9 percent and 4 percent—with the percentage tied to a project’s eligible development costs. (Four percent credits are typically paired with tax-exempt bonds to fund a project.) Once awarded credits, a developer sells them to an individual investor or, more commonly, to a tax-credit syndication fund made up of equity from one or from many investors. In return, the investors receive a credit against their federal income tax based on the size of their investments. They can also realize losses, which provides an additional tax benefit.
Investors have a variety of reasons for committing capital to these projects. There is the financial incentive in the form of a reduced tax liability. But for most the reasons go beyond that. They often have specific community development goals, regulatory requirements and/or public relations objectives that are well-served by their tax-credit investments.
What is the Syndicator’s Role
Tax-credit syndicators help bridge the gap between the various parties to affordable housing transactions. Syndicators raise money from investors and identify low-income housing projects in which to invest that capital. Nonprofit syndicators, like NEF, Inc., are particularly focused on building long-term relationships with partners.
As such, NEF, Inc.'s acquisitions and asset management staff members work closely with developers to not only structure and close on project investments, but to also deliver the kind of technical assistance that ensures the financial and operational success of projects for many years to come. At the end of the 15-year compliance period for a project—as required by the federal regulations—we help provide strategies for maintaining the property as decent, affordable housing, while developing a successful exit strategy for investors.
Our investment management team has a similar focus on the needs of investors, ensuring they get access to the types of projects they would like to acquire and the type of reporting they need to manage those investments.
Both the acquisitions and the investor sides of the business further NEF, Inc.'s resolve to help revitalize communities across the country. We bring together community-focused investors and project sponsors to help make that happen
